This document consists of 20 pages, of which this is page number 1.
The index to Exhibits is on Page 19.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL QUARTER ENDED JANUARY 31, 1998, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _____ to _________.
Commission file number: 0-27446
LANDEC CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3025618
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3603 HAVEN AVENUE
MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices)
Registrant's telephone number, including area code:
(650) 306-1650
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for at least the
past 90 days.
Yes X No
--- ---
As of March 4, 1998, 12,727,671 shares of the Registrant's common stock
were outstanding.
-1-
LANDEC CORPORATION
FORM 10-Q For the Quarter Ended January 31, 1998
INDEX
Page
Facing sheet 1
Index 2
PART I. FINANCIAL STATEMENTS
Item 1. a) Consolidated condensed balance sheets as of
January 31, 1998 and October 31, 1997 3
b) Consolidated statements of operations for the
three months ended January 31, 1998 and 1997 4
c) Consolidated statements of cash flows for the
three months ended January 31, 1998 and 1997 5
d) Notes to consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults in Senior Securities 16
Item 4. Submission of Matters to a Vote of Security
Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
a) Exhibits 17
b) Reports on Form 8-K 17
Signature 18
Index to Exhibits 19
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDEC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
January 31, October 31,
1998 1997
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $11,456 $ 5,163
Short-term investments 3,813 9,506
Restricted investment -- 8,837
Accounts receivable, net 2,084 2,162
Inventory 3,328 2,652
Deferred advertising 637 410
Prepaid seed corn 2,250 750
Prepaid expenses and other current assets 1,071 560
------- --------
Total Current Assets 24,639 30,040
Property and equipment, net 5,227 5,023
Intangible assets, net 14,708 14,985
Other assets 90 112
------- --------
$44,664 $ 50,160
------- --------
------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,332 $ 642
Accrued compensation 811 836
Other accrued liabilities 726 1,520
Payable related to acquisition of
Dock Resins Corporation -- 9,189
Deferred revenue 7,622 2,326
Current portion of long term debt 8 6
------- --------
Total Current Liabilities 10,499 14,519
Non-current portion of long term debt 23 26
Shareholders' Equity:
Preferred stock -- --
Common stock 75,771 75,679
Notes receivable from shareholders (8) (8)
Deferred compensation (170) (198)
Accumulated deficit (41,451) (39,858)
------- --------
Total Shareholders' Equity 34,142 35,615
------- --------
$44,664 $ 50,160
------- --------
------- --------
SEE ACCOMPANYING NOTES.
-3-
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended January 31,
1998 1997
------------- -------------
Revenues:
Product sales $ 4,194 $ 78
License fees 500 --
Research and development revenues 365 217
-------- -------
Total revenues 5,059 295
Operating costs and expenses:
Cost of product sales 3,178 113
Research and development 1,210 916
Selling, general and administrative 2,427 620
-------- -------
Total operating costs and expenses 6,815 1,649
-------- -------
Operating loss (1,756) (1,354)
Interest income 252 493
Interest expense (82) (12)
-------- -------
Loss from continuing operations (1,586) (873)
Loss from discontinued QuickCast operations -- (422)
-------- -------
Net loss $(1,586) $(1,295)
Loss per share:
Continuing operations $ (.12) $ (.08)
Discontinued operations -- (.04)
-------- -------
Net loss per share $ (.12) $ (.12)
-------- -------
-------- -------
Shares used in computation of net
loss per share 12,706 10,760
-------- -------
-------- -------
SEE ACCOMPANYING NOTES.
-4-
LANDEC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended January 31,
1998 1997
-------------- -------------
Cash flows from operating activities:
Net loss from continuing operations $(1,586) $(873)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 487 108
Amortization of deferred compensation 28 28
Loss from discontinued operations -- (422)
Changes in current assets and liabilities:
Accounts receivable 78 (79)
Inventory (676) 71
Deferred advertising (227) --
Prepaid seed corn (1,500) --
Prepaid expenses and other current assets (511) (27)
Accounts payable 690 (186)
Accrued compensation (25) 57
Other accrued liabilities (794) (57)
Deferred revenue 5,296 63
------- -------
Total adjustments 2,846 (444)
------- -------
Net cash provided by (used in) operating
activities 1,260 (1,317)
------- -------
Cash flows from investing activities:
Decrease in other assets 22 --
Purchases of property and equipment (414) (400)
Purchases of available-for-sale securities (573) (8,597)
Sale of available-for-sale securities 2,856 --
Maturities of available-for-sale securities 3,403 6,500
------- -------
Net cash provided by (used in) investing
activities: 5,294 (2,497)
------- -------
Cash flows from financing activities:
Maturity of restricted investment 8,837 --
Proceeds from sale of common stock 92 54
Payment of payable related to acquisition (9,189) --
Payments of long term debt (1) (55)
------- -------
Net cash used in financing activities (261) (1)
------- -------
Net increase (decrease) in cash and cash
equivalents 6,293 (3,815)
Cash and cash equivalents at beginning of
period 5,163 14,185
------- -------
Cash and cash equivalents at end of period $11,456 $10,370
------- -------
------- -------
SEE ACCOMPANYING NOTES.
-5-
LANDEC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Landec
Corporation (the "Company" or "Landec") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position, results of
operations, and cash flows at January 31, 1998, and for all periods presented,
have been made. Although the Company believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information normally included in financial statements and
related footnotes prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The accompanying
financial data should be reviewed in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 1997.
The results of operations for the three month period ended January 31,
1998 are not necessarily indicative of the results that may be expected for
the fiscal year ended October 31, 1998. For instance, due to the cyclical
nature of the corn seed industry, a significant portion of Fielder's Choice
Hybrids' ("Fielder's Choice") revenues and profits will be concentrated over a
few months during the spring planting season (generally during the Company's
second and third fiscal quarters).
2. RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform to the current year presentation.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method)
or market and consisted of the following:
January 31, October 31,
1998 1997
----------- -----------
Raw materials........................ $ 819 $ 617
Work in process...................... 301 152
Finished goods....................... 2,208 1,883
------ ------
$3,328 $2,652
------ ------
------ ------
4. LICENSING OF PORT TECHNOLOGY
In December 1997, the Company licensed the rights to worldwide
manufacturing, marketing and distribution of the PORT-TM- ophthalmic devices
to a large national eye care company in exchange for $500,000 in cash, and
future license revenue, research and development revenue and royalties on the
sale of commercial products. For the first quarter of fiscal year 1998, the
Company recognized $500,000 in license revenues and $110,000 in research and
development revenues associated with this arrangement.
5. COMMITMENTS
In December 1997, Dock Resins Corporation ("Dock Resins"), a wholly owned
subsidiary of the Company, entered into a loan and security agreement which
provides a $1,250,000 working capital line of credit and a $2,750,000 term
loan to finance capital expenditures. Borrowings under the loan agreement are
-6-
collateralized by substantially all of Dock Resins' assets. As of January 31,
1998, no amounts had been borrowed against this line of credit.
-7-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in Part I--Item 1
of this Form 10-Q and the audited consolidated financial statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1997.
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements that involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Potential risks and
uncertainties include, without limitation, those mentioned in this report and,
in particular the factors described below under "Additional Factors That May
Affect Future Results," and those mentioned in the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1997.
OVERVIEW
Since its inception in October 1986, the Company has been primarily
engaged in the research and development of its Intelimer-Registered
Trademark- technology and related products. The Company has launched three
product lines from this core development -- QuickCast-TM- splints and casts,
in April 1994; Intellipac-Registered Trademark- breathable membranes for the
fresh-cut produce packaging market, in September 1995; and Intelimer Polymer
Systems for the industrial specialties market in June 1997. As part of an
effort to focus and build on three strategic businesses -- Food Products,
Industrial Specialties and Agriculture -- the Company has recently completed
several strategic transactions. In April 1997, the Company acquired Dock
Resins, which is primarily engaged in the manufacturing and marketing of
specialty acrylics and other polymers. In September 1997, Intellicoat
Corporation ("Intellicoat"), a subsidiary of the Company, acquired Fielder's
Choice, a direct marketer of hybrid seed corn. In August 1997, the Company
sold its QuickCast product line to Bissell Healthcare Corporation of
Bolingbrook, Illinois. In December 1997, the Company licensed the rights to
worldwide manufacturing, marketing and distribution of the PORT ophthalmic
devices to a large national eyecare company. The Company has been
unprofitable since its inception and expects to incur additional losses,
primarily due to the continuation of its research and development activities,
charges related to acquisitions, and expenditures necessary to further
develop its manufacturing and marketing capabilities. From inception through
January 31, 1998, the Company's accumulated deficit was $41.5 million.
RESULTS OF OPERATIONS
The Company's results of operations reflect only continuing operations of
the Company. The results of the discontinued QuickCast operation are
discussed separately in the respective sections.
Total revenues were $5.1 million for the first quarter of fiscal year
1998 compared to $295,000 for the first quarter of fiscal year 1997. Revenues
from product sales increased to $4.2 million in the first quarter of fiscal
year 1998 from $78,000 in the first quarter of fiscal year 1997 due primarily
to $3.4 million of product sales from Dock Resins. Also contributing to the
increase were Intellipac breathable membrane product sales which increased
from $78,000 in the first quarter of fiscal year 1997 to $743,000 in the first
quarter of fiscal year 1998, due primarily to an increase in unit sales.
Revenues from license fees were $500,000 for the first quarter of fiscal year
1998 compared to none in the first quarter of fiscal year 1997. The increase
in license fees was due to an upfront payment received from a large national
eyecare company in exchange for the licensed rights to worldwide
manufacturing, marketing and distribution of the PORT ophthalmic devices.
Revenues from research and development funding were $365,000 for the first
quarter of fiscal year 1998 compared to $217,000 for the first quarter of
fiscal year 1997. The increase in research and development revenues was
primarily due to an agreement the Company entered into in December 1997 with a
large national eyecare company for the funding of the PORT program. Product
sales for the discontinued QuickCast product line for the first quarter of
fiscal year 1997 were $95,000 which was included in the loss from discontinued
operations.
-8-
Cost of product sales consists of material, labor and overhead. Cost of
product sales was $3.2 million for the first quarter of fiscal year 1998
compared to $113,000 for the first quarter of fiscal year 1997. Cost of
product sales as a percentage of product sales decreased to 76% in the first
quarter of fiscal year 1998 from 145% in the first quarter of fiscal year
1997. The decrease in the cost of product sales as a percentage of product
sales in the first quarter of fiscal year 1998 as compared to the first
quarter of fiscal year 1997 was primarily the result of higher margins
resulting from product sales of the Dock Resins products. Cost of product
sales for the discontinued QuickCast product line for the first quarter of
fiscal year 1997 was $196,000, which was included in the loss from
discontinued operations. The Company anticipates that gross margins as a
percentage of revenue will continue to improve due to the historically higher
margins achieved from sales of Dock Resins' and Fielder's Choice's products
which have historically ranged between approximately 30% to 45%. However,
longer-term improvement is unpredictable due to the early stage of
commercialization of several of the Company's products and integration of
certain of these products into Dock Resins' manufacturing process.
Research and development expenses were $1.2 million for the first quarter
of fiscal year 1998 compared to $916,000 for the first quarter of fiscal year
1997, an increase of 32%. The Company's research and development expenses
consist primarily of expenses involved in the development, process scale-up
and efforts to protect intellectual property content of the Company's enabling
side chain crystallizable polymer technology and research and development
expenses related to Dock Resins' products. The increase in research and
development expenses in the first quarter of fiscal year 1998 compared to the
first quarter of fiscal year 1997 was primarily due to the inclusion of
development costs for Dock Resins, acquired in April 1997, during the first
quarter of fiscal year 1998. In future periods, the Company expects that
spending for research and development will continue to increase in absolute
dollars, although it may vary as a percentage of total revenues.
Selling, general and administrative expenses were $2.4 million for the
first quarter of fiscal year 1998 compared to $620,000 for the first quarter
of fiscal year 1997, an increase of 291%. Selling, general and administrative
expenses consist primarily of sales and marketing expenses associated with the
Company's product sales, business development expenses, and staff and
administrative expenses. Selling, general and administrative expenses
increased primarily as a result of increased sales and marketing expenses
associated with Intelimer Polymer Systems and Intellicoat products and the
additional expenses for Dock Resins' and Fielder's Choice which were acquired
in the second and fourth quarters of fiscal year 1997, respectively.
Specifically, sales and marketing expenses increased to $1.4 million for the
first quarter of fiscal year 1998 from $222,000 for the first quarter of
fiscal year 1997. Sales and marketing costs for the discontinued QuickCast
product line for the first quarter of fiscal year 1997 were $314,000, which
was included in the loss from discontinued operations. Although the Company
expects to achieve certain future cost savings as a result of the
discontinuation of the QuickCast product line, the Company's total selling,
general and administrative spending for existing and newly acquired products
will continue to increase in absolute dollars in future periods, although it
may vary as a percentage of total revenues.
Net interest income was $170,000 for the first quarter of fiscal year
1998 compared to $481,000 for the first quarter of fiscal year 1997. Net
interest income decreased primarily due to the lower cash balance as a result
of the acquisitions of Dock Resins and Fielder's Choice.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1998 the Company had unrestricted cash, cash
equivalents and short-term investments of $15.3 million, a net increase of
$600,000 from $14.7 million as of October 31, 1997. This increase was
primarily due to cash provided by operations of $1.3 million in the first
quarter of fiscal year 1998 which included approximately $5.3 million from
deposits made on future corn seed shipments. This cash provided by
operations was partially offset by the maturity of a restricted investment of
$8.8 million which was used toward the payment of the $9.2 million payable
related to the acquisition of Dock Resins. Although the Company generated
positive cash from operations during the first quarter of fiscal year 1998,
there can be no assurance that the Company will continue to do so. In
particular, because of the seasonal nature of some of the Company's lines of
business, the Company
-9-
expects its operating results to fluctuate substantially from quarter to
quarter. See "Quarterly Fluctuations in Operating Results".
During the first quarter of fiscal year 1998, the Company purchased seed
processing equipment and computer hardware and software and incurred building
improvement expenditures to support the development of Intellicoat products,
incurred leasehold improvement expenditures at its Menlo Park location to
upgrade existing facilities and incurred building improvement expenditures at
Dock Resins to expand capacity. These expenditures represented the majority
of the $414,000 of property and equipment purchased during the first quarter
of fiscal year 1998.
The Company believes that existing cash, cash equivalents and short-term
investments will be sufficient to finance its operational and capital
requirements through at least the next twelve months. The Company's future
capital requirements, however, depend on numerous factors, including the
progress of its research and development programs; the development of
commercial scale manufacturing capabilities; the development of marketing,
sales and distribution capabilities; the ability of the Company to maintain
existing collaborative and licensing arrangements and establish and maintain
new collaborative and licensing arrangements; the assimilation and integration
of Dock Resins and Fielder's Choice into Landec and Intellicoat, respectively;
the timing and amount, if any, of payments received under licensing and
research and development agreements; the costs involved in preparing, filing,
prosecuting, defending and enforcing intellectual property rights; the ability
to comply with regulatory requirements; the emergence of competitive
technology and market forces; the effectiveness of product commercialization
activities and arrangements; and other factors. If the Company's currently
available funds, together with the internally generated cash flow from
operations are not sufficient to satisfy its financing needs, the Company
would be required to seek additional funding through other arrangements with
collaborative partners, bank borrowings and public or private sales of its
securities. There can be no assurance that additional funds, if required,
will be available to the Company on favorable terms if at all.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company desires to take advantage of the "Safe Harbor" provisions of
the Private Securities Litigation Reform Act of 1995 and of Section 21E and
Rule 3b-6 under the Securities Exchange Act of 1934. Specifically, the
Company wishes to alert readers that the following important factors, as well
as other factors including, without limitation, those described elsewhere in
this Report, could in the future affect, and in the past have affected, the
Company's actual results and could cause the Company's results for future
periods to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. The Company assumes no
obligation to update such forward-looking statements.
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT. The Company has
incurred net losses in each year since its inception, including a loss from
continuing operations of $1.6 million for the three months ended January 31,
1998, and the Company's accumulated deficit as of January 31, 1998 totaled
$41.5 million. The Company may incur additional losses in the future. The
amount of future net losses and the time required by the Company to reach
profitability are highly uncertain and there can be no assurance that the
Company will be able to reach or sustain profitability.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. In the past, the Company's
results of operations have varied significantly from quarter to quarter and
such fluctuations are expected to continue in the future. Quarterly operating
results will depend upon several factors, including the timing and amount of
expenses associated with expanding the Company's operations, the timing of
collaborative agreements with, and performance of, potential partners, the
timing of regulatory approvals and new product introductions, the mix between
pilot production of new products and full-scale manufacturing of existing
products and the mix between domestic and export sales. The Company also
cannot predict rates of licensing fees and royalties received from its
partners. In addition, due to the cyclical nature of the corn seed industry,
a significant portion of Fielder's Choice revenues and profits will be
concentrated over a few months during the spring planting season (generally
during the Company's second and third fiscal quarters). As a result of these
and other factors, the Company expects to continue to experience
-10-
significant fluctuations in quarterly operating results, and there can be no
assurance that the Company will become or remain profitable in the future.
UNCERTAINTY RELATING TO INTEGRATION OF NEW BUSINESS ACQUISITIONS. The
successful combination of the Company and Dock Resins and Intellicoat and
Fielder's Choice will require substantial effort from each organization. The
diversion of the attention of management and any difficulties encountered in
the transition process could have a material adverse effect on the Company's
ability to realize the anticipated benefits of the acquisitions. The
successful combination of the companies will also require coordination of
their research and development, manufacturing, and sales and marketing
efforts. In addition, the process of combining the organizations could cause
the interruption of, or a loss of momentum in, the Company's activities.
There can be no assurance that the Company will be able to retain key
management, technical, sales and customer support personnel of Dock Resins and
Fielder's Choice, or that the Company will realize the anticipated benefits of
the acquisitions, and the failure to do so would have a material adverse
effect on the Company's business, operating results and financial condition.
EARLY COMMERCIALIZATION; DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES;
UNCERTAINTY OF MARKET ACCEPTANCE. While the Company recently commenced
marketing certain of its Intelimer polymer products, it is in the early stage
of product commercialization of these products and many of its potential
products are in development. The Company believes that its future success
will depend in large part on its ability to develop and market new products in
its target markets and in new markets. In particular, the Company expects
that its ability to compete effectively with existing food products,
industrial, agricultural and medical companies will depend substantially on
successfully developing, commercializing, achieving market acceptance of and
reducing the cost of producing the Company's products. In addition,
commercial applications of the Company's temperature switch polymer technology
are relatively new and evolving. There can be no assurance that the Company
will be able to successfully develop, commercialize, achieve market acceptance
of or reduce the cost of producing the Company's products, or that the
Company's competitors will not develop competing technologies that are less
expensive or otherwise superior to those of the Company. There can be no
assurance that the Company will be able to develop and introduce new products
and technologies in a timely manner or that new products and technologies will
gain market acceptance. The failure to develop and successfully market new
products would have a material adverse effect on the Company's business,
operating results and financial condition.
The success of the Company in generating significant sales of its
products will depend in part on the ability of the Company and its partners
and licensees to achieve market acceptance of the Company's products and
technology. The extent to which, and rate at which, market acceptance and
penetration are achieved by the Company's current and future products is a
function of many variables including, but not limited to, price, safety,
efficacy, reliability, conversion costs and marketing and sales efforts, as
well as general economic conditions affecting purchasing patterns. There can
be no assurance that markets for the Company's products will develop or that
the Company's products and technology will be accepted and adopted. The
failure of the Company's products to achieve market acceptance would have a
material adverse effect on the Company's business, operating results and
financial condition.
COMPETITION AND TECHNOLOGICAL CHANGE. The Company operates in highly
competitive and rapidly evolving fields, and new developments are expected to
continue at a rapid pace. Competition from large food products, industrial,
agricultural and medical companies is expected to be intense. In addition,
the nature of the Company's collaborative arrangements may result in its
corporate partners and licensees becoming competitors of the Company. Many of
these competitors have substantially greater financial and technical resources
and production and marketing capabilities than the Company, and may have
substantially greater experience in conducting clinical and field trials,
obtaining regulatory approvals and manufacturing and marketing commercial
products. There can be no assurance that these competitors will not succeed
in developing alternative technologies and products that are more effective,
easier to use or less expensive than those which have been or are being
developed by the Company or that would render the Company's technology and
products obsolete and non-competitive.
-11-
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON THIRD PARTIES. The
Company's success is dependent in part upon its ability to manufacture its
products in commercial quantities in compliance with regulatory requirements
and at acceptable costs. There can be no assurance that the Company will be
able to achieve this. The Company has experienced negative gross margins on
certain of its products sold. Although the Company believes Dock Resins will
provide Landec with practical knowledge in the scale-up of Intelimer polymer
products, production in commercial-scale quantities may involve technical
challenges for the Company. The Company anticipates that a substantial
portion of the Company's products will be manufactured in the Linden, New
Jersey facility acquired in the purchase of Dock Resins. The Company's
reliance on this facility involves a number of potential risks, including the
absence of adequate capacity, the unavailability of, or interruption in access
to, certain process technologies and reduced control over delivery schedules,
and low manufacturing yields and high manufacturing costs. The Company may
also need to consider seeking collaborative arrangements with other companies
to manufacture certain of its products. If the Company becomes dependent upon
third parties for the manufacture of its products, then the Company's profit
margins and its ability to develop and deliver such products on a timely basis
may be adversely affected. Moreover, there can be no assurance that such
parties will adequately perform and any failures by third parties may delay
the submission of products for regulatory approval, impair the Company's
ability to deliver products on a timely basis, or otherwise impair the
Company's competitive position. The occurrence of any of these factors could
have a material adverse effect on the Company's business, operating results
and financial condition. The manufacture of the Company's products will be
subject to periodic inspection by regulatory authorities. There can be no
assurance that the Company will be able to obtain necessary regulatory
approvals on a timely basis or at all. Delays in receipt of or failure to
receive such approvals or loss of previously received approvals would have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON SINGLE SOURCE SUPPLIERS. Many of the raw materials used
in manufacturing certain of the Company's products are currently purchased
from a single source, including certain monomers used to synthesize Intelimer
polymers and substrate materials for the Company's Intellipac breathable
membrane products. In addition, virtually all of the hybrid corn varieties
sold by Fielder's Choice are purchased from a single source. Upon
manufacturing scale-up and increases in hybrid corn sales, the Company may
enter into alternative supply arrangements. Although to date the Company has
not experienced difficulty acquiring materials for the manufacture of its
products nor has Fielder's Choice experienced difficulty in acquiring hybrid
corn varieties, no assurance can be given that interruptions in supplies will
not occur in the future, that the Company will be able to obtain substitute
vendors, or that the Company will be able to procure comparable materials or
hybrid corn varieties at similar prices and terms within a reasonable time.
Any such interruption of supply could have a material adverse effect on the
Company's ability to manufacture and distribute its products and,
consequently, could materially and adversely affect the Company's business,
operating results and financial condition.
CUSTOMER CONCENTRATION. For the three months ended January 31, 1998,
sales to the Company's top five customers accounted for approximately 52% of
the Company's product sales with the top customer accounting for 22% of the
Company's product sales. The Company expects that for the foreseeable future
a limited number of customers may account for a substantial portion of its net
revenues. The Company may experience changes in the composition of its
customer base as Dock Resins and Fielder's Choice have experienced in the
past. The Company does not have long-term purchase agreements with any of its
customers. The reduction, delay or cancellation of orders from one or more
major customers for any reason or the loss of one or more of such major
customers could materially and adversely affect the Company's business,
operating results and financial condition. In addition, since the products
manufactured in the Linden, New Jersey facility are often sole sourced to its
customers, the Company's operating results could be materially and adversely
affected if one or more of its major customers were to develop other sources
of supply. There can be no assurance that the Company's current customers
will continue to place orders, that orders by existing customers will not be
canceled or will continue at the levels of previous periods or that the
Company will be able to obtain orders from new customers.
PATENTS AND PROPRIETARY RIGHTS. The Company's success depends in large
part on its ability to obtain patents, maintain trade secret protection and
operate without infringing on the proprietary rights of third parties. There
can be no assurance that any pending patent applications will be approved,
that the Company will develop additional proprietary products that are
patentable, that any patents issued to the Company will provide the
-12-
Company with competitive advantages or will not be challenged by any third
parties or that the patents of others will not prevent the commercialization
of products incorporating the Company's technology. The Company has received,
and may in the future receive, from third parties, including some of its
competitors, notices claiming that it is infringing third party patents or
other proprietary rights. For example, the Company has received a letter
alleging that its Intellipac breathable membrane product infringes patents of
another party. The Company has investigated this matter and believes that its
Intellipac breathable membrane product does not infringe the specified patents
of such party. The Company has received an opinion of patent counsel that the
Intellipac breathable membrane product does not infringe any valid claims of
such patents. If the Company were determined to be infringing any third-party
patent, the Company could be required to pay damages, alter its products or
processes, obtain licenses or cease certain activities. If the Company is
required to obtain any licenses, there can be no assurance that the Company
will be able to do so on commercially favorable terms, if at all. Litigation,
which could result in substantial costs to and diversion of effort by the
Company, may also be necessary to enforce any patents issued or licensed to
the Company or to determine the scope and validity of third-party proprietary
rights. Any such litigation or interference proceeding, regardless of
outcome, could be expensive and time consuming and could subject the Company
to significant liabilities to third parties, require disputed rights to be
licensed from third parties or require the Company to cease using such
technology and, consequently, could have a material adverse effect on the
Company's business, operating results and financial condition.
GOVERNMENT REGULATION. The Company's products and operations are
subject to substantial regulation in the United States and foreign countries.
Although Landec believes that it will be able to comply with all applicable
regulations regarding the manufacture and sale of its products and polymer
materials, such regulations are always subject to change and depend heavily on
administrative interpretations and the country in which the products are sold.
There can be no assurance that future changes in regulations or
interpretations relating to such matters as safe working conditions,
laboratory and manufacturing practices, environmental controls, and disposal
of hazardous or potentially hazardous substances will not adversely effect the
Company's business. There can be no assurance that the Company will not be
required to incur significant costs to comply with such laws and regulations
in the future, or that such laws or regulations will not have a material
adverse effect on the Company's business, operating results and financial
condition. Failure to comply with the applicable regulatory requirements can,
among other things, result in fines, injunctions, civil penalties, suspensions
or withdrawal of regulatory approvals, product recalls, product seizures,
including cessation of manufacturing and sales, operating restrictions and
criminal prosecution.
ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose
various environmental controls on the discharge or disposal of toxic, volatile
or otherwise hazardous chemicals and gases used in certain manufacturing
processes. Dock Resins is involved in various investigations and proceedings
conducted by the federal Environmental Protection Agency and certain state
environmental agencies regarding disposal of waste materials and the
remediation of its Linden, New Jersey facility. Although the factual
situations and the progress of each of these matters differ, the Company
believes certain escrowed funds will prove adequate to account for any
resultant liability, including any New Jersey Industrial Site Recovery Act
remediation regarding its Linden, New Jersey facility. In most cases, the
Company's liability will be limited to sharing clean-up or other remedial
costs with other potentially responsible parties. Any failure by the Company
to control the use of, or to restrict adequately the discharge of, hazardous
substances under present or future regulations could subject it to substantial
liability or could cause its manufacturing operations to be suspended and
could have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance that changes in
environmental regulations will not impose the need for additional capital
equipment or other requirements.
LIMITED SALES AND MARKETING EXPERIENCE. The Company has only limited
experience marketing and selling its Intelimer polymer products. While Dock
Resins will provide consultation and in some cases direct marketing support
for Landec's Intelimer polymer products, establishing sufficient marketing and
sales capability will require significant resources. The Company intends to
distribute certain of its products through its corporate partners and other
distributors and to sell certain other products through a direct sales force.
There can be no assurance that the Company will be able to recruit and retain
skilled sales management, direct salespersons or distributors, or that the
Company's sales and marketing efforts will be successful. To the extent that
the Company has or will enter into distribution or other collaborative
arrangements for the sale of its products, the Company will
-13-
be dependent on the efforts of third parties. There can be no assurance that
such sales and marketing efforts will be successful and any failure in such
efforts could have a material adverse effect on the Company's business,
operating results and financial condition.
DEPENDENCE ON COLLABORATIVE PARTNERS AND LICENSEES. The Company's
strategy for the development, clinical and field testing, manufacture,
commercialization and marketing of certain of its current and future products
includes entering into various collaborations with corporate partners,
licensees and others. To date, the Company has entered into collaborative
arrangements with The BFGoodrich Company and Hitachi Chemical in connection
with its Intelimer Polymer Systems; Fresh Express Farms, Apio, Inc., Roplast
Industries, Inc. and PrintPack, Inc. in connection with its Intellipac
breathable membrane products; and Nitta Corporation and Hitachi Chemical in
connection with its adhesive products. The Company is dependent on its
corporate partners to develop, test, manufacture and/or market certain of its
products. Although the Company believes that its partners in these
collaborations have an economic motivation to succeed in performing their
contractual responsibilities, the amount and timing of resources to be devoted
to these activities are not within the control of the Company. There can be no
assurance that such partners will perform their obligations as expected or
that the Company will derive any additional revenue from such arrangements.
There can be no assurance that the Company's partners will pay any additional
option or license fees to the Company or that they will develop and market any
products under the agreements. Moreover, certain of the collaborative
agreements provide that they may be terminated at the discretion of the
corporate partner, and certain of the collaborative agreements provide for
termination under certain other circumstances. In addition, there can be no
assurance as to the amount of royalties, if any, on future sales of QuickCast
and PORT products as the Company no longer has control over the sales of such
products since the sale of the QuickCast and the license of the PORT product
lines.
There can be no assurance that the Company's partners will not pursue
existing or alternative technologies in preference to the Company's
technology. Furthermore, there can be no assurance that the Company will be
able to negotiate additional collaborative arrangements in the future on
acceptable terms, if at all, or that such collaborative arrangements will be
successful. To the extent that the Company chooses not to or is unable to
establish such arrangements, it would experience increased capital
requirements to undertake research, development, manufacture, marketing or
sale of its current and future products in such markets. There can be no
assurance that the Company will be able to independently develop, manufacture,
market, or sell its current and future products in the absence of such
collaborative agreements and failure to do so could have a material adverse
effect on the Company's business, operating results and financial condition.
INTERNATIONAL OPERATIONS AND SALES. In the first quarter of the fiscal
year 1998 and 1997, approximately 8% and 64%, respectively, of the Company's
total revenues were derived from product sales to and collaborative agreements
with international customers, and the Company expects that international
revenues, although down from historical levels, will continue to be an
important component of its total revenues. A number of risks are inherent in
international transactions. International sales and operations may be limited
or disrupted by the regulatory approval process, government controls, export
license requirements, political instability, price controls, trade
restrictions, changes in tariffs or difficulties in staffing and managing
international operations. Foreign regulatory agencies have or may establish
product standards different from those in the United States, and any inability
to obtain foreign regulatory approvals on a timely basis could have an adverse
effect on the Company's international business and its financial condition and
results of operations. While the Company's foreign sales are currently priced
in dollars, fluctuations in currency exchange rates, such as those recently
experienced in many Asian countries which comprise a part of the territories
of certain of the Company's collaborative partners, may reduce the demand for
the Company's products by increasing the price of the Company's products in
the currency of the countries to which the products are sold. There can be no
assurance that regulatory, geopolitical and other factors will not adversely
impact the Company's operations in the future or require the Company to modify
its current business practices.
PRODUCT LIABILITY EXPOSURE AND AVAILABILITY OF INSURANCE. The testing,
manufacturing, marketing, and sale of the products being developed by the
Company involve an inherent risk of allegations of product liability. While
no product liability claims have been made against the Company to date, if any
such claims were made and adverse judgments obtained, they could have a
material adverse effect on the Company's business, operating results
-14-
and financial condition. Although the Company has taken and intends to
continue to take what it believes are appropriate precautions to minimize
exposure to product liability claims, there can be no assurance that it will
avoid significant liability. The Company currently maintains medical and
non-medical product liability insurance in the minimum amount of $4.0 million
per occurrence with a minimum annual aggregate limit of $5.0 million. There
can be no assurance that such coverage is adequate or will continue to be
available at an acceptable cost, if at all. A product liability claim,
product recall or other claim with respect to uninsured liabilities or in
excess of insured liabilities could have a material adverse effect on the
Company's business, operating results and financial condition.
POSSIBLE VOLATILITY OF STOCK PRICE. Factors such as announcements of
technological innovations, the attainment of (or failure to attain) milestones
in the commercialization of the Company's technology, new products, new
patents or changes in existing patents, the acquisition of new businesses or
the sale or disposal of a part of the Company's businesses, or development of
new, collaborative arrangements by the Company, its competitors or other
parties, as well as government regulations, investor perception of the
Company, fluctuations in the Company's operating results and general market
conditions in the industry may cause the market price of the Company's Common
Stock to fluctuate significantly. In addition, the stock market in general
has recently experienced extreme price and volume fluctuations, which have
particularly affected the market prices of technology companies and which have
been unrelated to the operating performance of such companies. These broad
fluctuations may adversely effect the market price of the Company's Common
Stock.
IMPACT OF YEAR 2000. The Company is in the process of performing its
assessment of the impact of year 2000 on its operations. Management is in the
process of formalizing its assessment procedures and developing a plan to
address identified issues. The Company has evaluated its financial and
accounting and inventory tracking systems and concluded that they are not
materially affected by the year 2000. It is unknown the extent, if any, of
the impact of the year 2000 on other systems and equipment. A corporate-wide
inventory of computer applications is being performed and is expected to be
completed by the end of fiscal year 1998 after which the Company will attempt
to remedy any issues. The Company has also begun communications with its
facilities managers to determine the impact on building security and related
equipment. There can be no assurance that all third parties will address the
year 2000 issue in a timely fashion if at all. Any year 2000 compliance
problems of either the Company, its suppliers, its manufacturers, its
collaborative partners and licensees or its customers could have a material
adverse effect on the Company's business, operating results and financial
condition.
-15-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with its initial public offering in 1996, the Company filed
a Registration Statement on Form S-1, SEC File No. 33-80723 (the "Registration
Statement"), which was declared effective by the Commission on February 12,
1996. Pursuant to the Registration Statement, the Company registered
3,220,000 shares of its Common Stock, $0.001 par value per share, for its own
account. The offering commenced on February 15, 1996 and did not terminate
until all of the registered shares had been sold. The aggregate offering
price of the registered shares was $38,640,000. The managing underwriters of
the offering were Smith Barney and Lehman Brothers.
From February 1, 1996 to January 31, 1998, the Company incurred the
following expenses in connection with the offering:
Underwriting discounts and commissions $2,705,000
Other expenses 900,000
----------
Total Expenses $3,605,000
----------
All of such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after deducting the total
expenses above were $35,035,000. From February 1, 1996 to January 31, 1998,
the Company used such net offering proceeds, in direct or indirect payments to
others, as follows:
Purchase and installment of machinery and equipment $ 2,100,000
Repayment of indebtedness $ 600,000
Acquisitions of other businesses $17,300,000
Working capital $ 3,500,000
-----------
Total $23,500,000
Each of such amounts is a reasonable estimate of the application of the
net offering proceeds. This use of proceeds does not represent a material
change in the use of proceeds described in the prospectus of the Registration
Statement.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-16-
ITEM 5. OTHER INFORMATION
In January 1998, the Company effected an option-repricing program. This
program offered certain employees and all directors of the Company who had
outstanding options to purchase Common Stock of the Company an opportunity to
exchange such options for new options. Each new option contains the same
terms as the surrendered option except that (i) the exercise price is $5.00
per share and (ii) the vesting schedule for each new option begins on December
4, 1997, except for the options granted under the Director's Plan, which are
fully vested on date of grant. As a result of this repricing program, options
to purchase 573,850 shares were exchanged (options granted under the
Directors' Plan are subject to shareholder approval).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed two reports on Form 8-K during the period from
November 1, 1997 to January 31, 1998. On December 15, 1997 the Company filed
a Form 8-K/A reporting the financial statements for the acquisition of
Fielder' Choice. On January 30, 1998 the Company filed a Form 8-K/A-2
reporting the financial information for the sales of certain assets and the
license of certain rights relating to the QuickCast product line.
-17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LANDEC CORPORATION
By: /s/ Joy T. Fry
----------------------------------
Joy T. Fry
Vice President, Finance
and Administration
and Chief Financial Officer
(Duly Authorized and Principal
Financial and Accounting Officer)
Date: March 12, 1998
-18-
LANDEC CORPORATION
INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ------- ------- -------------
27.1 Financial Data Schedule 20
-19-